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World Bank shares blame for the railways fiasco

Tuesday January 19 2010


What is the role of the Bretton Woods institutions in the mess we face over the concessioning of the Kenya-Uganda Railways? A short history is in order.

In July 2002, the International Finance Corporation (IFC), the World Bank’s lending affiliate, signed an agreement with the government appointing the IFC as the lead adviser on the concessioning of the Kenya-Uganda Railways.

Under that agreement, the IFC was mandated to advise the government throughout the stages of the privatisation process, from tendering and selection of the concessionaire, to the actual closure and handing over of the assets to Rift Valley Railways (RVR).

For more than four years, IFC experts working on the concession would fly in and out of Kenya, wowing government officials and the press with power presentations, even as they lived in expensive hotels for months on end, all at the expense of the taxpayer.

As a matter of fact, the IFC dedicated a total of eight of its own staffers, all of them touted as highly-skilled experts in the area of infrastructure privatisation.

They became very influential in the preparations and were always at hand to give background press briefings to journalists as the transaction progressed.

Indeed, all preparatory work, from doing a technical assessment of the railway network to doing a legal due diligence valuation of assets of the Kenya Railways Corporation, and, finally, to selecting the concessionaire itself, were either done by IFC staffers themselves, or by consultants working under them.

We paid heavily for these services. Under the agreement for advisory services, we were to pay them Sh80 million at closure.

Many more millions of shillings were paid as the transaction progressed. The agreement obliged the government to pay IFC experts hundreds of millions of shillings in monthly retainer fees. The experts from Washington were also paid millions to cover their subsistence and out-of-pocket travel expenses.

Thus, if blame is to be apportioned for the mess in which the concession finds itself in right now, Bretton Woods must get its full share.

Where were all those IFC experts when Mr Roy Puffet was selected to be the one to run and manage the railways? This is a man who had not seen the inside of the boardroom of a company of the size of Rift Valley Railways Corporation before.

Where were these expensively procured experts from Washington when we were entrusting the running of a public asset as critical to the functioning of the Kenya and Uganda economies to an individual of such doubtful credentials?

The truth of the matter is that Mr Puffet is hardly known even in corporate circles of his native South Africa. Apparently, he used to run some low-key logistics and transport businesses in a mine on the outskirts of Port Elizabeth.

The role of the IFC did not end with preparing and negotiating the transaction: it also negotiated to lend some $20 million to the concession.

Is there no conflict of interest here? First, the IFC advises the government to hand over a public asset to a shell company, thus committing Kenya to an unworkable privatisation experiment.

Then they withhold the loans they /have committed to the project on the grounds that the concession has not performed. They have earned their millions in fees and do not care whether the experiment fails.

If this concession collapses, we must find how to hold the IFC experts involved in this transaction to account. I say so because the future of the concession is right now in limbo. Chances that it may be cancelled are high, indeed.

Two week ago, the government directed the shareholders of RVR to implement a turnaround programme or face cancellation of the concession.

Specifically, the government wants the shareholders to sign an agreement committing them to migrate to a new company to be known as the Kenya-Uganda Railways Holdings.

But the shareholders can’t agree on the terms of a new agreement. A high-stakes battle for control of the company pitting a local equity fund, Transcentury Ltd., and Citadel Capital of Egypt, has made a compromise even more difficult.

A crucial joint meeting of the Kenya and Uganda governments has been convened in Kampala on Wednesday to decide the fate of the concession.

Cancelling the concession will come with grave consequences. In the first place, the RVR shareholders will incur massive losses. The money the Egyptians paid Mr Puffet for an indirect stake in the company will count for nothing.

The stakes for Uganda are even higher. Until the country invests in a refinery, it has to depend on the Kenya-Uganda railway system to transport crude exports.